September 2024 Newsletter: Why Nothing Stops This Fiscal Train

in 2022, both consumer sentiment and the misery index (the sum of inflation and unemployment levels) reached recessionary levels, but again without an NBER-defined recession:

This, I would argue, is a hallmark of fiscal dominance. The credit cycle on its own over the past couple years was typical for a recession, but the credit cycle is now smaller

From a politicians’ standpoint, the best realistic scenario for them is that money supply growth will be high to support the deficits as needed, but that there will be enough productivity growth from AI and other areas to offset it and prevent aggregate prices from increasing too rapidly.

The problem, however, is that even if that were to happen for

The United States’ tax receipts are more correlated to asset prices than most other countries, with tax receipts lagging the performance of the stock market. This can be seen in both absolute terms and year-over-year terms:

One of the primary themes that I’ve frequently written about going back to 2020 and that has guided a lot of my investment decisions, is the concept that the United States is in the process of entering fiscal dominance.

This means that fiscal deficits are larger and more impactful for the economy and for financial markets than they used to be, and a

When looking at U.S. markets, I think there’s a little bit from both of those areas that can be helpful. During periods of fiscal dominance, the general trends are that 1) governments often try to restrict the flow of capital in subtle or overt ways, 2) asset prices are often not as nominally bearish as you might expect since the denominator is wea

Developed countries reached their peak of centralization back then. Franklin D. Roosevelt, at the height of his power, had over 70% of Congress in his party. Roosevelt and his party had a supermajority, and could pass almost anything they wanted, could stack the Supreme Court if they contested him, and had plenty of political power to suppress aspe

Item #2: Inefficient Healthcare Spending

The United States government subsidizes the raw ingredients that go into inexpensive carbohydrate-based ultra-processed foods. For example, the high-fructose corn syrup industry gets more federal funds (via subsidies for types of corn that are bred for that purpose and inedible for corn-on-the-cob consumpti

A country with well over 100% debt-to-GDP has two main choices in this scenario. The first choice is that they can keep interest rates very low despite periods of price inflation that occurs, and debase all of the currency holders and bond holders. Japan is far enough into fiscal dominance that they’ve chosen that route. The second choice is that t